Money is a never-ending problem, said
Alvin Ailey.

Those who lack money, crib about the
lack of it. Those who have, debate when, where and how to spend, save or invest
it, how to reap dividends and how to keep it safe.

For conservative Indian investors and
most of retired Indians, bank deposits are the most popular instruments. They
are considered to be the safest.

However, the proposed Financial
Resolution and Deposit Insurance Bill (FRDI) has been making a lot of bad noise
off late and has released shock waves among depositors.

As is the case with government of
India, all difficult even harsh measures are imposed with sugar coating of
words. There goes our Finance Minister who says that the underlying
intention behind the FRDI Bill is to “provide a specialised resolution
mechanism to deal with bankruptcy situations in banks, insurance firms and
financial sector entities”.

What is missing from this statement is
the fact that the specialised resolution is to come from depositors’ money!

On one hand, we have the entire
banking system in shambles with unforeseen NPAs on account of fraudulent and
irregular funding without any checks and balances (even corruption playing some
part) to biggest industrial houses in India. The government has to come up with
the Bankruptcy code to retrieve whatever can be recovered – it is expected that
not even 10% of NPAs will ultimately be recovered, if at all.

After these haircuts, some of the
banks for sure struggle to survive – how they will recover is to be in
accordance with the FRDI Bill.

Any bank on the brink of failure will
make its creditors and depositors take a loss on their holdings. The FRDI bill
will allow dying banks to restructure their liability, which will include even
depositors’ money lying with them.

So, the government will bail out the
defaulting borrowers by punishing the depositors. The banks may seize your
deposits and issue fixed-term bonds or other securities with a lock-in.

Therefore, if passed in its present
form, your deposits with the banks will not be safe or liquid any more.

This experiment has already been
unsuccessfully employed in several other countries.

The moot question here is – are the
banks trustworthy enough? The same banks who have lost big money due to
corruption or lack of due diligence are will be asking depositors to trust them
with their money for a longer term and lose liquidity. What is the safeguard
that the banks will not misuse this money again to lend to sub-standard
borrowers?

You may see it any which ways, but it
seems the government wants to reward the loan defaulters by attaching the
depositors’ money to bring dying banks to life.

In any case, your deposits are not
completely safe even now, insured only up to Rs. 100,000.

May be time to withdraw your money and
keep it in a Tijori or keep it underground. This is not Digital India the
government wants us to push to.

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 Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at [email protected].